The Eighth Circuit Court of Appeals recently decided Rozo v. Principal Life Ins. Co., No. 21-2026, __F.4th__, 2022 WL 4005339 (8th Cir. Sept. 2, 2022) on the case’s second trip to the circuit. Frederick Rozo, on behalf of himself and a class of plan participants, sued Principal Life Insurance Company under ERISA claiming that Principal breached its fiduciary duty of loyalty by setting a low interest rate for participants in its Principal Fixed Income Option (PFIO), a stable value contract, that it offers to employer-sponsored 401(k) plans. Rozo also claimed that Prudential engaged in a prohibited transaction by using the PFIO contract to make money for itself. On the first trip to the Eighth Circuit, the court reversed the district court’s determination that Principal was not a fiduciary. On remand, the district court entered judgment in favor of Principal. This time the Eighth Circuit affirmed.
On the breach of the fiduciary duty of loyalty claim, the court noted that this circuit has not yet set forth factors determining whether plan administrators acted solely in participants’ interests. To determine whether a conflict of interest existed between Principal and the participants, the court first determines the parties’ interests. Following the First Circuit’s analysis in Ellis v. Fid. Mgmt. Tr. Co., 883 F.3d 1, 9 (1st Cir. 2018) (affirming summary judgment for plan administrator), the court found that there is tension between the parties’ interests. Here, Principal is not paid for offering the PFIO. It is compensated for any positive spread between what it promises to credit participants and what its investments actually yield. The higher the “deducts” to the Guaranteed Interest Rate (GIR), the lower the rate paid to participants. The court found that this tension does not inevitably result in a type of conflict that establishes a breach of the duty of loyalty. Scrutinizing Prudential’s actions, the court held that the district court did not err in (1) determining that Principal set the Composite Crediting Rate (CCR) (weighted average of all the GIRs) in participants’ interest that balanced the best rate they could offer participants while also accounting for Principal’s anticipated costs and risks; (2) determining that the deducts were set in participants’ interests; and (3) determining “that the deducts were reasonable and set by Principal in the participants’ interest of paying a reasonable amount for the PFIO’s administration.”
On the prohibited transaction claim, the court disagreed with Rozo that Principal engaged in prohibited self-dealing because it made money for itself from the plan contract. The court found that Principal proved that its compensation was reasonable. It was supported by witness testimony that the district court deemed credible. The court affirmed the judgment in favor of Principal on this claim because it is exempted from liability for receiving reasonable compensation.
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